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Stronger Global Fuel Demand


While negative divergence between softer crude oil and stronger product prices continued yesterday, a new high in April crude oil this morning indicates residual bullish interest in crude oil. In addition to pre-existing and growing optimism towards Chinese energy demand recovery, the energy complex has also seen growing evidence of stronger global fuel demand. In fact, indications of very aggressive Indian and Chinese refinery activity, a lofty upside price forecast from Goldman, a noted weekly decline in Singapore fuel stocks and several bullish major oil company CEO price forecasts for crude provides the bull camp with a plethora of bullish arguments. However, bullishness from reports of increasing Chinese road congestion are offset by predictions that Chinese electric vehicles will represent 30% of their total fleet. Surprisingly, yesterday’s build in EIA crude oil stocks and an expansion of the crude oil year-over-year inventory surplus failed to limit gains and prevent a strong close in April crude yesterday, leaving near term upside targeting at $80.00. In fact, EIA crude oil inventories have increased every week this year and have seen the trend of building US crude oil inventories confirmed by typically larger weekly API crude stocks. Certainly, favorable Chinese economic data helps to underpin crude oil, but crude oil looks to continue to take a backseat to the action in the gasoline market. Fortunately for the bull camp, US crude oil exports this week posted a record with a 23% gain and a net export tally of 5.6 million barrels per day. On the other hand, strong export data is tempered by a 9th straight week increase in Cushing, Oklahoma storage which is the world’s largest storage facility. While we give the edge to the bull camp, we are still suspicious of the ability to track higher without a steady flow of positive Chinese economic news and or a reversal of the risk-off environment outside of China.


Given the massive beating in natural gas prices over the last year, seeing prices post consistently higher highs is a major moral victory for the bull camp. While the gas market might come under pressure following US EIA inventory data (because of an undersized seasonal withdrawal) significant cold in northern Europe combined with a surge in European gas imports should provide the bull camp with an ongoing bullish edge. Furthermore, US exports continue to expand and the threat against a halt of Russian gas shipments through Ukraine might escalate following the drone attack inside Russia. Reports that a Ukrainian drone attack was seen near Moscow creates a significant public relations problem for the Russian President as the idea of a special military operation limited to Ukraine has been brought closer to home and a wider portion of the Russian people are now aware of troubles with the war. However according to Ukrainian reports, gas flow from Russia through pipelines under the country increased overnight. In retrospect, we remain very surprised Russia continues to transit gas through the Ukraine especially after the Russians indicated wreckage from the drone attack was of Ukrainian origin. While we leave the bull camp with a minor edge, we suspect part of the gains are the result of short covering and not long-term bottom picking by speculators and commercial accounts. While the increase in US exports is supportive, the restart of the US export facility has not reached high enough levels to prompt broad speculative buying.


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